Payday Loans Being Used By Poorest Scots To Become Bankrupt

The doubling of the cost to become bankrupt in Scotland in the past six months has seen a surge in the most vulnerable Scots taking out payday loans to afford the bankruptcy fee.

Up until 1 June 2012, individuals seeking debt relief could apply to become bankrupt in Scotland for £100 - in England the fee can be much higher - typically £525 for the bankruptcy application plus another £150 or so in court fees - but as of last June that fee doubled to £200.

The enormous fee hike is part of a plan by the Scottish government to make the process of bankruptcy self sufficient; Since 2006-07, Accountant in Bankruptcy (AiB) has been working to reduce funding from the Scottish Government, to reduce its reliance on funding from the public purse.

But for someone approaching bankruptcy, £200 is a lot of money to find, and insolvency practitioners have seen cases where the most desperate are forced to take out a payday loan to fund that fee.

"People are finding it's too much," said Peter Dean, managing director at Carrington Dean. "I've heard from people who've asked us for advice that they're borrowing the money...from payday loan companies, merely to go into bankruptcy."

Dean added his office had seen a particular rise in payday loan use among people under the age of 25, with many of them having between six and 12 different payday loans - although many will be with the same ultimate provider.

Bryan Jackson, senior insolvency practitioner at PKF, said he too had heard stories about people using payday loans to apply for bankruptcy.

"The Scottish government's idea to raise the bankruptcy fee us a political one, so they can say bankruptcies are self funded," he told HuffPost UK.

"But the legislation is supposed to help those most in need by providing debt relief. If they can't afford the £200 and are looking at loans to fund it, it's taking on debt to get out of debt - it's contradictory."

John Hall, Scottish council member for the insolvency trade body R3, and practicing insolvency practitioner in Edinburgh for the Invocas group, said while he personally hadn't seen any cases of people using payday loans for bankruptcy fees, he wasn't surprised to hear of it happening.

"It may not sound like a lot of money, but if you're in that position, £200 is a lot of money to find," he told the Huffington Post UK.

What's more concerning, he added, was the rumoured proposal for a new insolvency bill draft, which would see all debts incurred in the immediate weeks before insolvency being excluded from historical debts being written off - meaning any payday loans used to file for bankruptcy would not be wiped out by the bankruptcy order.

Payday loans are designed to be a short term solution to a lack of cash until the next pay cheque – but they often come at extraordinary costs of more than 4,000% APR.

R3 research revealed recently that 5 million adults say they are likely to seek a payday loan in the next six months – up from 3.5m a year ago.

For those facing debt problems in Scotland, there is an alternative - debt arrangement schemes allow individuals to pay off their debts for up to 10 years without interest or charges.

In England and Wales, those owing less than £15,000 and with assets of less than £300 (and a car worth less than £1,000) can apply for a debt relief order (DRO), which sees the individual pay a one-off fee of £90 to have the debt written off.

The DRO lasts for a year, and during that time none of the person's creditors will be able to take action against them to get their money back. At the end of the year, the person is free of all the debts listed in the order.